Organigram Holdings Inc. Condensed Consolidated Interim Financial Statements (Unaudited) For the three and six months ended February 28, 2019 and 2018

Transcription

1 Organigram Holdings Inc. Condensed Consolidated Interim Financial Statements (Unaudited) For the three and six months ended February 28, 2019 and

2 TABLE OF CONTENTS Management s Responsibility for the Financial Statements 1 Condensed Consolidated Interim Statements of Financial Position 2 Condensed Consolidated Interim Statements of Income (Loss) and Comprehensive Income (Loss) 3 Condensed Consolidated Interim Statements of Changes in Equity 4 Condensed Consolidated Interim Statements of Cash Flows 5 Notes to the Condensed Consolidated Interim Financial Statements 6-29

3 April 12, 2019 Management s Responsibility for the Financial Statements The accompanying condensed consolidated interim financial statements of Organigram Holdings Inc. ( OHI or the Company ) have been prepared by the Company s management in accordance with International Financial Reporting Standards and contain estimates based on management s judgment. Internal control systems are maintained by management to provide reasonable assurance that assets are safe-guarded and financial information is reliable. The Board of Directors of the Company is responsible for ensuring that management fulfills its responsibilities for financial reporting and is ultimately responsible for reviewing and approving the financial statements and the accompanying management discussion and analysis. The Board of Directors carries out this responsibility principally through its Audit Committee. The Audit Committee is appointed by the Board of Directors. It meets with the Company s management and auditors and reviews internal controls and financial reporting matters to ensure that management is properly discharging its responsibilities before submitting the financial statements to the Board of Directors for approval. (signed) Greg Engel Chief Executive Officer Moncton, New Brunswick (signed) Paolo De Luca, CPA, CA Chief Financial Officer Moncton, New Brunswick 1

4 ORGANIGRAM HOLDINGS INC. CONDENSED CONSOLIDATED INTERIM STATEMENTS OF FINANCIAL POSITION As at February 28, 2019 and August 31, 2018 (Unaudited - expressed in CDN $000 s) FEBRUARY 28, 2019 AUGUST 31, 2018 ASSETS Current assets Cash $ 12,477 $ 55,064 Short-term investments (Note 5) 50,882 75,000 Accounts receivable (Note 6) 28,028 3,736 Biological assets (Note 7) 19,835 19,858 Inventories (Note 8) 95,134 44,969 Prepaid expenses (Note 13 and Note 23) 1,388 3,372 Assets classified as held for sale (Note 24) - 1, , ,214 Property, plant and equipment (Note 9) 153,282 98,639 Intangible assets (Note 10) 1,530 - Deferred charges (Note 13 and Note 23) Investments in associates (Note 14) 13,114 - $ 376,150 $ 302,567 LIABILITIES Current liabilities Accounts payable and accrued liabilities $ 15,145 $ 10,764 Current portion of long-term debt (Note 11) 1, Current portion of unsecured convertible debentures (Note 12) 49,332 - Liabilities classified as held for sale (Note 24) ,428 11,250 Long-term debt (Note 11) 10,996 2,877 Unsecured convertible debentures (Note 12) - 95,866 Contingent share consideration (Note 14) 1,618 - Deferred tax liability 20,224 7,980 SHAREHOLDERS EQUITY 99, ,973 Share capital (Note 13) 228, ,790 Reserve for options and warrants (Note 13) 24,170 26,045 Accumulated Other Comprehensive Income 54 - Retained earnings 23, On Behalf of the Board: s/greg Engel, Director s/peter Amirault, Director The accompanying notes are an integral part of these Condensed Consolidated Interim Financial Statements. 276, ,594 $ 376,150 $ 302,567 2

5 ORGANIGRAM HOLDINGS INC. CONDENSED CONSOLIDATED INTERIM STATEMENTS OF INCOME (LOSS) AND COMPREHENSIVE INCOME (LOSS) For the three and six months ended February 28, 2019 and 2018 (Unaudited - expressed in CDN $000 s except share amounts) THREE MONTHS ENDED FEBRUARY 28, SIX MONTHS ENDED FEBRUARY 28, REVENUE Gross revenue $ 33,473 $ 2,926 $ 47,957 $ 5,325 Sales returns (Note 18) (5) 469 Excise taxes (6,539) - (8,579) - Net revenue 26,934 3,395 39,373 5,794 Cost of sales (Note 25) 10,591 1,437 13,494 2,785 Indirect production (Note 19) , Gross margin before fair value adjustments 16,044 1,771 24,866 2,367 Fair value changes to biological assets and changes in inventory sold (Note 7) (8,086) 4,384 34,839 5,106 Gross margin 7,958 6,155 59,705 7,473 EXPENSES General and administrative (Note 22) 2,603 1,734 4,774 2,655 Sales and marketing (Note 25) 3, ,495 1,858 Share-based compensation (Note 13) 3,985 1,154 4,957 1,899 Total expenses 9,726 3,822 15,226 6,412 INCOME (LOSS) FROM OPERATIONS (1,768) 2,333 44,479 1,061 Financing costs 4,314 1,429 8,504 1,480 Investment income (229) (286) (475) (381) Share of loss from investments in associates (Note 14) Unrealized loss on changes in fair value of contingent consideration (Note 14) Income (loss) from continuing operations before tax (7,006) 1,190 35,297 (38) Income tax (recovery) expense Deferred, net (620) - 12,166 - Net income (loss) from continuing operations (6,386) 1,190 23,131 (38) Loss from discontinued operations (Note 24) - (114) (38) (286) NET INCOME (LOSS) $ (6,386) $ 1,076 $ 23,093 $ (324) Other comprehensive gain Foreign currency translation gain, net of tax COMPREHENSIVE INCOME (LOSS) $ (6,332) $ 1,076 $ 23,147 $ (324) Net income (loss) from continuing operations per common share, basic (Note 13(vi)) $ (0.049) $ $ $ (0.000) Net income (loss) from continuing operations per common share, diluted (Note 13(vi)) $ (0.049) $ $ $ (0.000) Net loss from discontinued operations per common share, basic (Note 13(vi)) $ - $ (0.001) $ (0.000) $ (0.003) Net loss from discontinued operations per common share, diluted (Note 13(vi)) $ - $ (0.001) $ (0.000) $ (0.003) The accompanying notes are an integral part of these Condensed Consolidated Interim Financial Statements. CONDENSED CONSOLIDATED INTERIM STATEMENTS OF INCOME (LOSS) AND COMPREHENSIVE INCOME (LOSS) (UNAUDITED) FOR THE THREE AND SIX MONTHS ENDED FEBRUARY 28, 2019 AND

6 ORGANIGRAM HOLDINGS INC. CONDENSED CONSOLIDATED INTERIM STATEMENTS OF CHANGES IN EQUITY For the six months ended February 28, 2019 and 2018 (Unaudited - expressed in CDN $000 s except share amounts) NUMBER OF SHARES SHARE CAPITAL RESERVE FOR OPTIONS AND WARRANTS ACCUMULATED OTHER COMPREHENSIVE INCOME RETAINED EARNINGS/ (ACCUMULATED DEFICIT) SHAREHOLDERS' EQUITY Balance - September 1, ,521,404 $ 99,532 $ 3,081 $ - $ (19,755) $ 82,858 Share-based compensation (Note 13 (v)) - - 2, ,195 Share-based payments (Note 13 (iii)) 50, Exercise of stock options (Note 13 (iii)) 235, (176) Exercise of warrants (Note 13 (iv)) 4,313,837 6,608 (722) - - 5,886 Equity financing (Note 13 (iii)) 16,428,572 48,711 8, ,500 Equity financing issue costs (Note 13 (iii)) - (3,117) (562) - - (3,679) Convertible debenture allocation of discount (Note 13 (iii)) , ,905 Convertible debenture issue costs (Note 13 (iii)) - - (1,050) - - (1,050) Net loss and comprehensive loss (324) (324) Balance - February 28, ,549,696 $ 152,398 $ 28,460 $ - $ (20,079) $ 160,779 Balance - September 1, ,207,938 $ 157,790 $ 26,045 $ - $ 759 $ 184,594 Exercise of stock options (Note 13 (iii)) 1,163,567 2,703 (1,046) - - 1,657 Exercise of warrants (Note 13 (iv)) 2,251,043 11,367 (2,395) - - 8,972 Conversion of debentures (Note 13 (iii)) 10,946,301 57,385 (5,802) ,583 Tax impact of equity and debenture issue costs - (437) (69) Share-based compensation (Note 13 (v)) - - 7, ,000 Foreign currency translation gain, net of tax Net income ,093 23,093 Balance - February 28, ,568,849 $ 228,808 $ 24,170 $ 54 $ 23,852 $ 276,884 The accompanying notes are an integral part of these Condensed Consolidated Interim Financial Statements. CONDENSED CONSOLIDATED INTERIM STATEMENTS OF CHANGES IN EQUITY FOR THE THREE AND SIX MONTHS ENDED FEBRUARY 28, 2019 AND

7 ORGANIGRAM HOLDINGS INC. CONDENSED CONSOLIDATED INTERIM STATEMENTS OF CASH FLOWS For the six months ended February 28, 2019 and 2018 (Unaudited - expressed in CDN $000 s) CASH PROVIDED (USED) OPERATING ACTIVITIES FEBRUARY 28, 2019 FEBRUARY 28, 2018 Net income (loss) from continuing operations $ 23,131 $ (38) Items not affecting cash: Share-based compensation (Note 13) 6,983 1,899 Depreciation (Note 9) 3,490 1,096 Gain on disposal of property, plant and equipment (Note 9) (17) (1) Fair value adjustment to biological assets (2,434) 446 Financing costs 8,504 1,480 Investment income (475) (381) Share of loss from investments in associates (Note 14) Unrealized loss on changes in fair value of contingent consideration (Note 14) Deferred tax expense 12,166 - Changes in non-cash working capital: Net change in accounts receivable (24,150) 1,078 Net change in biological assets 2,457 (2,268) Net change in inventories (50,165) (6,085) Net change in accounts payable and accrued liabilities (Note 2) (5,199) (2,387) Net change in prepaid expenses and deferred charges 2,226 (388) Net cash used in continuing operations (22,330) (5,549) Net cash used in discontinued operations (Note 24) (35) (393) Net cash used in operating activities (22,365) (5,942) FINANCING ACTIVITIES Proceeds from share issuance (Note 13) - 57,500 Proceeds from convertible debenture issuance (Note 12) - 115,000 Payment of share issue costs (Note 13) - (4,729) Payment of convertible debenture issue costs (Note 12) - (6,094) Payment of long-term debt (Note 11) (206) (199) Proceeds from long-term debt, net of issue costs of $149 ( nil) (Note 11) 9, Stock options, warrants and units exercised (Note 13) 10,629 6,230 Interest paid (3,369) (672) Net cash provided by financing activities 16, ,195 INVESTING ACTIVITES Purchase of short-term investments (Note 5) - (124,200) Proceeds from short-term investments 25,000 32,000 Investment income Investments in associates (Note 14) (12,708) - Distributions received from investments in associates Proceeds on sale of property, plant and equipment (Note 9) Purchase of property, plant and equipment (Note 2 and 9) (48,745) (17,658) Purchase of intangible assets (Note 10) (1,530) - Net cash used in investing activities related to continuing operations (37,127) (109,462) Net cash used in investing activities related to discontinued operations (Note 24) - (30) Net cash used in investing activities (37,127) (109,492) CASH (USED) PROVIDED $ (42,587) $ 51,761 CASH POSITION Beginning of period $ 55,064 $ 1,957 End of period $ 12,477 $ 53,718 The accompanying notes are an integral part of these Condensed Consolidated Interim Financial Statements CONDENSED CONSOLIDATED INTERIM STATEMENTS OF CASH FLOWS (UNAUDITED) FOR THE SIX MONTHS ENDED FEBRUARY 28, 2019 AND

8 ORGANIGRAM HOLDINGS INC. NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS For the three and six months ended February 28, 2019 and 2018 (Unaudited - expressed in CDN $000 s except share amounts) 1. NATURE OF OPERATIONS Organigram Holdings Inc. ( OHI or the Company ) is a publicly traded corporation, a Tier II issuer, on the TSX Venture Exchange ( TSX-V ) with its common shares trading under the symbol OGI-V and on the OTCQX Best Market under the symbol OGRMF. The address of the registered office of OHI is 35 English Drive, Moncton, New Brunswick, Canada, E1E 3X3. The Company s major subsidiaries are Organigram Inc. ( OGI ), a Licensed Producer of cannabis and cannabis derived products in Canada regulated by Health Canada under the Cannabis Act and the Cannabis Regulations of Canada, and Canada Inc. ( 108 ), a holding company for OHI. OGI was incorporated, under the laws of the Province of New Brunswick, Canada, on March 1, is a federal company under the Canada Business Corporations Act. OHI is a federal company under the Canada Business Corporations Act. 2. CORRECTION OF RECLASSIFICATION ERROR TO PRESENTATION OF PRIOR PERIOD CONSOLIDATED STATEMENT OF CASH FLOW The following classification error that was corrected related to certain statement of cash flow items for the six months ended February 28, 2018: Net change in accounts payable and accrued liabilities (shown in the operating activities section of the statement of cash flow) and net cash used in operating activities were understated by $8,023 and purchase of property, plant and equipment (shown in the investment activities of the statement of cash flow) and net cash used in investing activities were overstated by $8,023. The amounts relate to timing differences between when acquisitions or construction services and product are received and ultimately paid. A summary of the impacts of the correction of the error for the six months ended February 28, 2018 is presented below. OPERATING ACTIVITIES AS REPORTED DISCONTINUED OPERATIONS ADJUSTMENT AS CORRECTED Net change in accounts payable and accrued liabilities $ 5,532 $ 104 $ (8,023) $ (2,387) Net cash used in operating activities $ 2,081 $ - $ (8,023) $ (5,942) INVESTING ACTIVITIES Purchase of property, plant and equipment $ (25,711) $ 30 $ 8,023 $ (17,658) Net cash used in investing activities $ (117,515) $ - $ 8,023 $ (109,492) 3. BASIS OF PREPARATION (I) STATEMENT OF COMPLIANCE The condensed consolidated interim financial statements have been prepared in compliance with the International Accounting Standard 34 Interim Financial Reporting ( IAS 34 ) as issued by the International Accounting Standards Board ( IASB ). The condensed consolidated interim financial statements should be read in conjunction with the annual consolidated financial statements of the Company for the year ended August 31, 2018, which have been prepared in accordance with International Financial Reporting Standards ( IFRS ) as issued by the IASB. The accounting policies applied are consistent with those applied in the annual consolidated financial statements except for those described in note 3(iii) and note 4. 6

9 These condensed consolidated interim financial statements were approved by the Board of Directors and authorized for issue by the Board of Directors on April 12, (II) BASIS OF MEASUREMENT These condensed consolidated interim financial statements have been prepared on a historical cost basis except for biological assets, short-term investments, and contingent share consideration, which are measured at fair value. Historical cost is the fair value of the consideration given in exchange for goods and services, which is generally based upon the fair value at the time of the transaction of the consideration given in exchange for assets. (III) FOREIGN CURRENCY TRANSLATION FUNCTIONAL AND PRESENTATION CURRENCY These condensed consolidated interim financial statements are presented in Canadian dollars, which is the Company s and its subsidiaries functional currency, except for the Company s investment in associate in alpha-cannabis Pharma GmbH for which the functional currency has been determined to be Euros. TRANSACTIONS AND BALANCES Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of foreign currency transactions and from the translation at period-end exchange rates of monetary assets and liabilities denominated in currencies other than an operation s functional currency are recognized in the consolidated statements of income (loss) and comprehensive income (loss). FOREIGN OPERATIONS The assets and liabilities of foreign operations, including goodwill and fair value adjustments arising on acquisition, are translated to Canadian Dollars at exchange rates at the reporting date. The income and expenses of foreign operations are translated to Canadian Dollars using average exchange rates for the month during which the transactions occurred. Foreign currency differences are recognized in other comprehensive income (loss) in the cumulative translation account. When the Company disposes of its entire interest in a foreign operation, or loses control over a foreign operation, the foreign currency gains or losses accumulated in other comprehensive income (loss) related to the foreign operation are recognized in profit or loss. If the Company disposes of part of an interest in a foreign operation that remains a subsidiary, a proportionate amount of foreign currency gains or losses accumulated in other comprehensive income (loss) related to the subsidiary is reallocated between controlling and non-controlling interests. (IV) BASIS OF CONSOLIDATION These condensed consolidated interim financial statements include the accounts of the Company and its subsidiaries on a consolidated basis after elimination of intercompany transactions and balances. Subsidiaries are entities the Company controls when it is exposed, or has rights, to variable returns from its involvement and has the ability to affect those returns through its power to direct the relevant activities of the entity. 4. SIGNIFICANT ACCOUNTING POLICIES (I) INVESTMENTS IN ASSOCIATES Associates are companies over which OHI has significant influence over and are accounted for under the equity method. Significant influence is presumed when the Company has an ownership interest greater than 20%, unless certain qualitative factors overcome this assumption. Conversely, where the Company has an ownership interest less than 20%, it is presumed that the Company does not have significant influence, unless certain qualitative factors overcome this assumption. In assessing significant influence and the ownership interest, potential voting rights that are currently exercisable are taken into consideration. Investments in associates are accounted for using the equity method and are initially recognized at cost, inclusive of transaction costs. The consolidated financial statements include the Company s share of the income or loss and equity movement of equity accounted associates. In accordance with IFRS, the associate s most recent available financial statements are used in the application of the equity method. Where the associate s reporting period differs from the Company s, the associate prepares financial information as of the same period end as the Company, unless it is 7

10 impracticable to do so. Otherwise, the Company will adjust for its share of income and expenses and equity movement based on the associate s most recently completed financial statements, adjusted for the effects of significant transactions. The Company does not recognize losses exceeding the carrying value of its interest in the associate. (II) INTANGIBLE ASSETS Intangible assets are recorded at cost less accumulated amortization and impairment losses, if any. Intangible assets acquired in a business combination are measured at fair value at the acquisition date. Amortization of definite life intangibles is provided on a straight-line basis over their estimated useful lives, which do not exceed the contractual period, if any, except for off-market supply agreements, where amortization is provided based on the actual output received versus the estimated output forecast to be received over the life of the agreement. The estimated useful lives, residual values, and amortization methods are reviewed at each year end, and any changes in estimates are accounted for prospectively. Intangible assets with an indefinite life or not yet available for use are not subject to amortization. Research costs are expensed as incurred. Development expenditures are capitalized only if development costs can be measured reliably, the product or process is technically and commercially feasible, future economic benefits are probable, and the Company intends to and has sufficient resources to complete development to use or sell the asset. Other development expenditures are recognized as general and administrative expenses on the consolidated statement of income (loss) and comprehensive income (loss) as incurred. NEW STANDARDS AND INTERPRETATIONS ADOPTED (I) NEW OR AMENDED STANDARDS EFFECTIVE SEPTEMBER 1, 2018 The Company has adopted the following new or amended IFRS standards for the annual period beginning on September 1, IFRS 2 SHARE-BASED PAYMENTS The amendment clarifies how to account for the effects of vesting and non-vesting conditions on the measurement of cash-settled share-based payments, share-based payment transactions with a net settlement feature and a modification to the terms and conditions that changes the classification of the transactions. The amendment is effective for annual periods beginning on or after January 1, This was effective for the Company beginning September 1, Based on the Company s assessment, the adoption of the new standard did not have a significant impact on its consolidated financial statements. IFRS 9 FINANCIAL INSTRUMENTS A finalized version of IFRS 9, which contains accounting requirements for financial instruments, replacing IAS 39 Financial Instruments: Recognition and Measurement was issued in November 2009 and October The standard contains requirements in the following areas: classification and measurement, impairment, hedge accounting and de-recognition. Under IFRS 9, financial assets are initially measured at fair value plus, in the case of a financial asset not at fair value through profit and loss ( FVTPL ), transaction costs. Financial assets are subsequently measured at: i) FVTPL; ii) amortized cost; iii) debt measured at fair value through other comprehensive income ( FVOCI ); iv) equity investments designated at FVOCI; or v) financial instruments designated at FVTPL. The classification is based on whether the contractual cash flow characteristics represent solely payment of principal and interest (the SPPI test ) as well as the business model under which the financial assets are managed. Financial assets are required to be reclassified only when the business model under which they are managed has changed. All reclassifications are to be applied prospectively from the reclassification date. 8

11 Debt investments are recorded at amortized cost for financial assets that are held within a business model with the objective to hold the financial assets in order to collect contractual cash flows that meet the SPPI test. The assessment of the Company s business models for managing the financial assets was made as of the date of initial application of September 1, The assessment of whether contractual cash flows on debt instruments meet the SPPI test was made based on the facts and circumstances as at the initial recognition of the financial assets. Consistent with IAS 39, all financial liabilities held by the Company under IFRS 9 are initially measured at fair value and subsequently measured at amortized cost. The following table summarizes the original measurement categories under IAS 39 and the new measurement categories under IFRS 9 for each class of the Company s financial assets and financial liabilities: Financial assets IAS 39 CLASSIFICATION IFRS 9 CLASSIFICATION Cash and cash equivalents Loans and receivables Amortized cost Short-term investments Held to maturity Amortized cost Accounts receivable Loans and receivables Amortized cost Investment in VIVO Cannabis Inc. N/A FVTPL Accounts payable and accrued liabilities Other liabilities Other liabilities Long-term debt Other liabilities Other liabilities Unsecured convertible debentures Other liabilities Other liabilities Impairment Under IFRS 9, the Company is required to apply an expected credit loss ( ECL ) model to all debt financial assets not held at FVTPL, where credit losses that are expected to transpire in future years are provided for, irrespective of whether a loss event has occurred or not as at the balance sheet date. For trade receivables, the Company has applied the simplified approach under IFRS 9 and has calculated ECLs based on lifetime expected credit losses taking into consideration historical credit loss experience and financial factors specific to the debtors and general economic conditions. The Company has assessed the impairment of its amounts receivable using the ECL model, and no difference was noted. As a result, no impairment loss has been recognized upon transition and at September 1, IFRS 15 REVENUE FROM CONTRACTS WITH CUSTOMERS In May 2014, the IASB issued IFRS 15 Revenue from Contracts with Customer ( IFRS 15 ), which provides a comprehensive framework for recognition, measurement and disclosure of revenue from contracts with customers, excluding contracts within the scope of the standards on leases, insurance contracts and financial instruments. The Company has applied IFRS 15 retrospectively but determined that there is no change to the comparative periods or transitional adjustments required as a result of the adoption of this standard. The Company s accounting policy for revenue recognition under IFRS 15 is as follows: To determine the amount and timing of revenue to be recognized, the Company follows a 5-step process: 1. Identifying the contract with a customer 2. Identifying the performance obligations 3. Determining the transaction price 4. Allocating the transaction price to the performance obligations 5. Recognizing revenue when/as performance obligation(s) are satisfied Revenue from the direct sale of cannabis and cannabis oil for a fixed price is recognized when the Company transfers control of the good to the customer, which is at point of shipment for medical cannabis and at point of delivery for recreational cannabis. 9

12 Revenue includes excise taxes, which the Company pays as principal, but excludes duties and taxes collected on behalf of third parties. Revenue also includes the net consideration to which the Company expects to be entitled. Revenue is recognised to the extent that it is highly probable that a significant reversal will not occur. Therefore, revenue is stated net of expected price discounts, allowances for customer returns and certain promotional activities and similar items. Generally, payment of the transaction price is due within credit terms that are consistent with industry practices, with no element of financing. Net revenue is revenue less excise taxes. Excise taxes are effectively a production tax which becomes payable when the product is removed from the Company s premises and may or may not be directly related to the value of revenue depending on the province of sale. It is generally not included as a separate item on external invoices; increases in excise tax are not always passed on to the customer and where a customer fails to pay for product received the Company cannot reclaim the excise tax. The Company therefore recognizes excise tax, unless it regards itself as an agent of the regulatory authorities, as a cost to the Company. II) NEW OR AMENDED STANDARDS ISSUED BUT NOT YET EFFECTIVE IFRS 16 LEASES In January 2016, the IASB issued IFRS 16 Leases ( IFRS 16 ), which establishes principles for the recognition, measurement, presentation and disclosure of leases, with the objective of ensuring that lessees and lessors provide relevant information that faithfully represents those transactions. IFRS 16 applies to annual reporting periods beginning on or after January 1, This will be effective for the Company beginning September 1, The Company reviewed its current and past leases. Reclassification of leases for office space and computer hardware will result in the establishment of additional right-of-use assets and lease liabilities on the statement of financial position, as well as changes in the timing and presentation of lease-related expenses on the statement of income. The Company is still evaluating the effect of this standard on the consolidated financial statements but expects there will be no material impact. 5. SHORT TERM INVESTMENTS The Company s short-term investments included the following on February 28, 2019 and August 31, 2018: DESCRIPTION INTEREST % FEBRUARY 28, 2019 AUGUST 31, 2018 GIC - maturing December 21, % $ - $ 25,000 GIC - Maturing August 27, % 50,000 50,000 Equity securities in VIVO Cannabis Inc $ 50,882 $ 75,000 The guaranteed investment certificates are redeemable prior to maturity. During the three months ended November 30, 2018, the Company sold its wholly-owned subsidiary, THC, for consideration consisting of shares in the purchaser (an unaffiliated publicly-traded company), VIVO Cannabis Inc. These securities are carried at fair value through profit and loss. At February 28, 2019, the shares in this company had a fair value of $1.02 per share. 10

13 6. ACCOUNTS RECEIVABLE The Company s accounts receivable included the following balances as of February 28, 2019 and August 31, 2018: FEBRUARY 28, 2019 AUGUST 31, 2018 Trade receivables $ 21,688 $ 817 Harmonized sales taxes receivable 5,581 2,526 Accrued investment income Government programs Rental property 86 - Other accounts receivable Less: Provision for doubtful accounts (63) (24) $ 28,028 $ 3,736 Included in other accounts receivable is a $50 (August 31, $75) promissory note bearing interest at 3% and redeemable on demand. 7. BIOLOGICAL ASSETS The Company measures biological assets consisting of cannabis plants at fair value less costs to sell up to the point of harvest, which becomes the basis for the cost of finished goods inventories after harvest. The changes in the carrying value of biological assets as of February 28, 2019 are as follows: OTHER BIOLOGICAL ASSETS CANNABIS ON PLANTS TOTAL Carrying amount, August 31, 2017 $ 6 $ 2,774 $ 2,780 Add (less) net production costs ,357 14,950 Net change in fair value less costs to sell due to biological transformation - 10,736 10,736 Transferred to inventory upon harvest - (8,608) (8,608) Carrying amount, August 31, 2018 $ 599 $ 19,259 $ 19,858 Add (less) net production costs (596) 15,253 14,657 Net change in fair value less costs to sell due to biological transformation - (2,434) (2,434) Transferred to inventory upon harvest - (12,246) (12,246) Carrying amount, February 28, 2019 $ 3 $ 19,832 $ 19,835 11

14 The fair value less costs to sell of biological assets is determined using a model which estimates the expected harvest yield in grams for plants currently being cultivated, and then adjusts that amount for the expected selling price per gram and also for any additional costs to be incurred, such as post-harvest costs. The following unobservable inputs, all of which are classified as Level 3 on the fair value hierarchy (see Note 17), are used in determining the fair value of biological assets: i. Average selling price per gram calculated as the weighted average historical selling price of cannabis sold by the Company, adjusted for expectations about future pricing; ii. Yield by plant represents the number of grams of finished cannabis inventory which are expected to be obtained from each harvested cannabis plant; iii. Wastage of plants based on their various stages of growth represents the weighted average percentage of biological assets which are expected to fail to mature into cannabis plants that can be harvested; iv. Post-harvest costs calculated as the cost per gram of harvested cannabis to complete the sale of cannabis plants post-harvest, consisting of the cost of direct and indirect materials and labour related to drying, labelling and packing. The Company estimates the harvest yields for the cannabis on plants at various stages of growth. As of February 28, 2019, it is expected that the Company s biological assets will yield 10,668 kilograms (August 31, ,036 kilograms) of cannabis when eventually harvested. The Company s estimates are, by their nature, subject to change and differences from the anticipated yield will be reflected in the fair value adjustment to biological assets in future periods. The Company accretes fair value on a straight-line basis according to stage of growth. As a result, a cannabis plant that is 50% through its 19-week growing cycle would be ascribed approximately 50% of its harvest date expected fair value less costs to sell (subject to wastage adjustments). Management believes the most significant unobservable inputs and their impact on fair value are as follows: WEIGHTED AVERAGE INPUT EFFECT ON FAIR VALUE SIGNIFICANT INPUTS & ASSUMPTIONS FEB. 28, 2019 AUG. 31, 2018 SENSITIVITY FEB. 28, 2019 AUG. 31, 2018 Average net selling price per gram $ 5.47 $ 5.65 Average yield per plant 141 grams 149 grams Increase or decrease by $1.00 per gram $ 4,145 $ 4,275 Increase or decrease by 10 grams $ 1,419 $ 1,292 The fair value adjustment to biological assets consists of the following: THREE MONTHS ENDED FEBRUARY 28, SIX MONTHS ENDED FEBRUARY 28, Realized fair value amounts included in inventory sold $ (16,738) $ (1,421) $ (26,198) $ (2,152) Increase (decrease) in fair value on growth of biological assets 9,508 5,805 61,893 7,258 Adjustment to net realizable value (856) - (856) - Fair value adjustment to biological assets $ (8,086) $ 4,384 $ 34,839 $ 5,106 12

15 8. INVENTORIES The Company s inventories are comprised of the following balances as of February 28, 2019 and August 31, 2018: QUANTITY FEBRUARY 28, 2019 CAPITALIZED COST FAIR VALUE ADJUSTMENT CARRYING VALUE Plants in drying stage 7,397 plants $ 969 $ 4,147 $ 5,116 Dry cannabis Available for packaging 4,986 kg 4,770 17,199 21,969 Packaged inventory 1,694 kg 1,909 6,314 8,223 Flower and trim available for extraction 9,006 kg 8,615 39,361 47,976 Concentrated extract 27 kg 456 1,255 1,711 Cannabis oil Bulk formulated oil 4,229 L 511 3,483 3,994 Bottled and packaged oil 2,017 L 167 1,715 1,882 Packaging and supplies 4,263-4,263 $ 21,660 $ 73,474 $ 95,134 QUANTITY CAPITALIZED COST AUGUST 31, 2018 FAIR VALUE ADJUSTMENT CARRYING VALUE Plants in drying stage 8,142 plants $ 873 $ 4,985 $ 5,858 Dry cannabis Available for packaging 5,032 kg 4,152 16,384 20,536 Packaged inventory 71 kg Flower and trim available for extraction 1,918 kg 1,570 10,327 11,897 Concentrated extract 40 kg 529 1,922 2,451 Cannabis oil Bulk formulated oil 2,632 L 600 2,116 2,716 Bottled and packaged oil 168 L Packaging and supplies $ 8,767 $ 36,202 $ 44,969 Flower and trim available for extraction is converted into concentrated extract, which can then be used for oil formulation (combining with a carrier oil) or other products such as edibles and vape pens. Concentrated extract consists of a high percentage cannabinoid (~70%) compound that is typically diluted into an end product. Bottled and bulk formulated oil contains either 1% (recreational formulation) or 2% (medical formulation) cannabinoid levels by mixing concentrated extract with a carried oil such as sunflower seed oil. The amount of inventory expensed in cost of sales for the three and six months ended February 28, 2019 was $9,980 and $12,462 (February 28, $1,248 and $2,409), respectively. 13

16 9. PROPERTY, PLANT AND EQUIPMENT Cost LAND BUILDINGS CONSTRUCTION IN PROCESS GROWING & PROCESSING EQUIPMENT OTHER TOTAL Balance, August 31, 2018 $ 2,205 $ 47,101 $ 11,993 $ 40,493 $ 2,922 $ 104,714 Additions 2 1,909 52,934 2,242 1,209 58,296 Construction completed - 4,225 (5,854) 525 1,104 - Disposals (171) - (171) Balance, February 28, 2019 $ 2,207 $ 53,235 $ 59,073 $ 43,089 $ 5,235 $ 162,839 Accumulated depreciation Balance, August 31, 2018 $ - $ (1,997) $ - $ (2,956) $ (1,122) $ (6,075) Depreciation - (1,023) - (2,123) (344) (3,490) Disposals Balance, February 28, 2019 $ - $ (3,020) $ - $ (5,071) $ (1,466) $ (9,557) Net book value August 31, 2018 $ 2,205 $ 45,104 $ 11,993 $ 37,537 $ 1,800 $ 98,639 February 28, 2019 $ 2,207 $ 50,215 $ 59,073 $ 38,018 $ 3,769 $ 153,282 During the six months ended February 28, 2019, there were additions of $58,296 in property, plant and equipment. Most of additions were related to the Company s expansion located at 35 English Drive, while the remainder were related to purchases of packaging equipment and IT system upgrades to facilitate recreational cannabis sales. During the period, the Company s electrical substation became operational at a cost of $4,052. The following table reconciles additions of property, plant and equipment per the above table to the purchases of property, plant and equipment per the statements of cash flows: FEBRUARY 28, 2019 FEBRUARY 28, 2018 Additions $ 58,296 $ 25,681 Net change in accounts payable and accrued liabilities related to capital acquisitions (9,551) (8,023) Purchase of property, plant and equipment $ 48,745 $ 17,658 14

17 10. INTANGIBLE ASSETS Cost SUPPLY AGREEMENT Balance, August 31, 2018 $ - Additions 1,530 Balance, February 28, 2019 $ 1,530 Accumulated amortization Balance, August 31, 2018 $ - Additions - Balance, February 28, 2019 $ - Net book value August 31, 2018 $ - February 28, 2019 $ 1,530 On January 18, 2019, the Company entered into an agreement with N.B. Inc. ( 1812 Hemp or 1812 ), a New Brunswick based industrial hemp research company, to secure supply and support research and development on the genetic improvement of hemp through traditional plant breeding methods. As part of the agreement, the Company will receive a 25% discount to the price per kilogram of dried hemp flower harvested that is purchased. The term of the agreement is from December 17, 2018 to December 16, 2023 and the Company has the option to renew it for another 5 years within six months notice. In addition, the Company has a right-of-first refusal on the future procurement of high CBD hemp from The Company paid $1,500 to 1812 plus transaction costs of $30 in connection with this transaction, which it has recorded as an intangible asset with a finite useful life that will be amortized based on the actual volume of dried hemp flower purchased as a proportion of its forecast purchase volumes. As at February 28, 2019, no product has been purchased. 11. LONG-TERM DEBT FEBRUARY 28, 2019 AUGUST 31, 2018 Farm Credit Canada ("FCC") credit facility - maturing December 1, 2019 with a 10 year amortization and a 5 year term variable rate plus 1.75% (currently 6.20%) $ 1,627 $ 1,740 Farm Credit Canada ("FCC") real property loan maturing December 1, 2020 with a 10 year amortization and 5 year term variable rate plus 2.15% (currently 6.60%) 1,130 1,194 Farm Credit Canada ("FCC") real property loan maturing December 1, 2023 with a 10 year amortization and a 3 year term variable rate plus 2.25% (currently 6.70%) 10,000 - Atlantic Canada Opportunities Agency ("ACOA") Business Development Program loan maturing September 1, 2024 with a 7 year amortization, bearing interest at an interest rate of 0% Deferred financing costs (151) (42) 12,947 3,298 Less: current portion of long term debt (1,951) (421) Long-term portion $ 10,996 $ 2,877 15

18 The FCC loans are secured by a first charge on 35 English Drive and all of the Company s other assets. The Company was in compliance with all covenants at February 28, Principal repayments required on the long-term debt in the next five fiscal years are as follows: 2019 $ , , , ,064 Thereafter 6,692 Total $ 13, UNSECURED CONVERTIBLE DEBENTURES On January 31, 2018, $115,000 of unsecured convertible debentures were issued. Each convertible debenture has a maturity date of January 31, 2020 (the maturity date ) and bears interest from the date of closing at 6.00% per annum, payable semi-annually on June 30 and December 31 of each year commencing on June 30, Each convertible debenture is convertible, at the option of the holder, into common shares of the Company ( common shares ) at any time prior to the close of business on the earlier of: (i) the business day immediately preceding the maturity date, and (ii) if subject to redemption in the event of a change of control, the business day immediately preceding the payment date, at a conversion price of $5.42 per common share (the conversion price ), subject to adjustment in certain events and to forced conversion by the Company in accordance with the indenture governing the convertible debentures. The Company may force conversion of the aggregate principal amount of the then outstanding convertible debentures at the conversion price on not less than 30 days notice should the daily volume weighted average trading price ( VWAP ) of the common shares be greater than $7.05 for any 10 consecutive trading days. The Company is also required to redeem the debentures at the holder s option in the event of a change in control at a price equal to 104% of the principal amount plus accrued and unpaid interest. The Company allocated the gross proceeds from issuance between the estimated fair value of the debt and equity components using the residual method. The Company used an effective annualized discount rate of 15.3% to arrive at the valuation of the debt component before issue costs at $98,095 and the equity component at $16,905. The effective interest rate on the debt component, inclusive of the equity discount and issue costs, is 18.0%. On February 27, 2019, the Company elected to exercise its right under the indenture governing the convertible unsecured debentures to convert all of the principal amount outstanding of the remaining debentures on April 1, 2019 into common shares of the Company on the basis of the daily VWAP of the common shares having exceeded $7.05 for 10 consecutive trading days. As of close of markets on February 26, 2019, the VWAP of the common shares for 10 consecutive trading days exceeded $7.05. The conversion was completed on April 1, 2019 and the balance outstanding at February 28, 2019 of approximately $53,653 (face value) of debentures outstanding was converted into 9,899,071 common shares, and accrued interest of $710 (less any required deductions or withholdings) was paid in cash. It should be noted that although the Company exercised its right to force conversion, holders of the debentures still had the right to convert their debentures at their discretion prior to April 1, 2019 and therefore approximately $37,738 (face value) of debentures were converted into 6,962,725 common shares during the month of March The Company did not issue fractional common shares on the conversion. Instead, the Company, in lieu of delivering a certificate representing such fractional interest, made a cash payment to the holder of an amount equal to the fractional interest in accordance with the indenture. As of April 1, 2019, no further liability or obligation exists with respect to the convertible unsecured debentures. 16

19 The debt component is measured at amortized cost. The conversion of debentures to common shares represents a non-cash financing activity, which has been excluded from the Company s statement of cash flows as these transactions do not provide or use any cash. The balance of the debt component as at February 28, 2019 and August 31, 2018 consists of the following: FEBRUARY 28, 2019 AUGUST 31, 2018 Debentures - maturing January 31, 2020 bearing interest at an interest rate of 6.00% - face value $ 115,000 $ 115,000 Less: conversion of debentures, cumulative (Note 13(iii)) (61,347) (2,018) Debentures - outstanding face value 53, ,982 Less: allocation to reserve for options and warrants for debenture discount (16,905) (16,905) Amortization of debenture discount 8,209 4,324 Less: issue costs (7,155) (7,155) Issue costs allocated to equity 1,061 1,061 Amortization of issue costs 2,876 1,559 Unamortized discount and issue costs transferred to equity upon conversion of debentures 7,593 - Debentures - carrying value 49,332 95,866 Less: current portion of debentures (49,332) - Long-term portion $ - $ 95, SHARE CAPITAL (I) AUTHORIZED SHARE CAPITAL The authorized share capital of the Company is an unlimited number of common shares without par value and an unlimited number of preferred shares without par value. All issued shares, consisting only of common shares, are fully paid. (II) ISSUED SHARE CAPITAL As at February 28, 2019, the Company s issued and outstanding share capital consisted of 139,568,849 (August 31, ,207,938) common shares with a stated value of $228,808 (August 31, $157,790). (III) ISSUANCES OF SHARE CAPITAL SHARE-BASED PAYMENTS On October 12, 2016, the Company issued 437,957 common shares at a share price of $1.37 as share consideration to TGS International LLC ( TGS ) in exchange for a trademark licensing agreement valued at $600. As per the terms of the agreement, the shares were released to TGS according to an escrow schedule related to certain calendar and operational milestones. At February 28, 2019, the Company has recorded the current portion of the fee of $133 (February 28, $133) as a prepaid expense, and the long-term portion of the fee of $200 (February 28, $467) as a deferred charge on the consolidated statements of financial position. For the three and six months ended February 28, 2019, $33 and $67 (February 28, $33 and $67), respectively, has been amortized to share-based compensation. On July 14, 2017, the Company entered into an advisory services agreement with a cannabis consultant that resulted in the grant of 135,000 common shares that vested over various service periods up to and including October 14, The fair value of the grant was measured based on the average monthly share price of the Company over the various tranches and vesting periods resulting in a cumulative expense of $539. On October 23, 2017, the Company issued 50,000 common shares, of which 20,000 related to the advisory services agreement, as share consideration to the consultant and recognized $144 to share capital. Subsequent to the period-end, the Company settled the remaining balance of 105,000 common shares due to the consultant in the form of common shares and restricted stock units of the Company, as described in Note 26(ii), which fully settles the Company s obligations relating to this agreement. 17

20 EXERCISE OF STOCK OPTIONS During the three months ended February 28, 2019, 460,917 (February 28, ,933) share options were exercised at an average exercise price of $1.61 (February 28, $1.80) for a value of $1,133 (February 28, $153) increase to share capital and a decrease to the reserve for options and warrants of $389 (February 28, $176). During the six months ended February 28, 2019, 1,163,567 (February 28, ,883) share options were exercised at an average exercise price of $1.42 (February 28, $1.46) for a value of $2,703 (February 28, $521) increase to share capital and a decrease to the reserve for options and warrants of $1,046 (February 28, $176). UNIT FINANCING On December 18, 2017, the Company issued 16,428,572 units by way of a bought deal at $3.50 per unit share for total gross consideration of $48,711 recorded to share capital and an increase of $8,789 to the reserve for options and warrants. Each unit consists of one common share and one-half common share purchase warrant (each whole common share purchase warrant, a Warrant ). Each Warrant entitles the holder thereof to acquire one common share of the Company at a price of $4.00 until June 18, Total issue costs were $3,678, with $3,116 charged to share capital and the remaining $562 charged to the reserve for options and warrants. These warrants are measured at fair value at the date of grant. In determining the amount of reserve for the warrants, the Company used the Black-Scholes option pricing model to establish the fair value of warrants granted using the following assumptions: Risk free interest rate % 1.6 Expected life of warrants (years) 1.5 Expected annualized volatility % 64.6 Expected dividend yield % - Volatility was estimated by using the weighted average historical volatility of the Company and other companies, that the Company considers comparable that have trading and volatility history. The expected life in years represents the period of time that the warrants granted are expected to be outstanding. The risk-free rate is based on government of Canada bonds with a remaining term equal to the expected life of the warrants. A forfeiture rate of zero percent was used as the Company anticipates all warrants will be exercised. CONVERTIBLE DEBENTURE FINANCING On January 31, 2018, 115,000 convertible debentures were sold at a price of $1,000 per convertible debenture, for aggregate gross proceeds of $115,000 resulting in an increase to the reserve for options and warrants of $16,905 net of deferred tax of $4,435, related to the embedded conversion feature in the convertible debenture (see Note 12). Total issue cost was $7,155 with $6,094 charged to the debenture liability and the remaining $1,061 charged to the reserve for options and warrants. CONVERSION OF DEBENTURES For the three months ended February 28, 2019, the Company issued 8,195,571 (February 28, 2018 nil) common shares at a price per share of $5.42 on the conversion of convertible debentures (Note 12) for an increase of $43,355 to share capital and a decrease of $4,344 to the reserve for options and warrants. For the six months ended February 28, 2019, the Company issued 10,946,301 (February 28, 2018 nil) common shares at a price per share of $5.42 on the conversion of convertible debentures (Note 12) for an increase of $57,385 to share capital and a decrease of $5,802 to the reserve for options and warrants. This non-cash financing activity has been excluded from the Company s statement of cash flows as it did not provide or use any cash. On February 27, 2019, the Company elected to exercise its right under the indenture governing the convertible unsecured debentures to convert all of the principal amount outstanding of the remaining debentures on April 1, 2019 into common shares of the Company on the basis of the daily VWAP of the common shares exceed $7.05 for any 10 consecutive trading days (see Note 12). 18